TWS: Oct. 26, 2020

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Graph of the Week | Economics

China’s economy had a booming third quarter. But, before we dive into the new figures, let’s take a stroll down memory lane. In Q2, China saw its economy grow by 3.2%. This growth was strongly led by secondary industry – manufacturing, industrials, and construction – breaking from precedent. These are extraordinary times, and as we explained then, this skew was largely thanks to fiscal stimulus and industrial stockpiling.

In the third quarter, the domestic economy grew by 4.9%, bringing China’s 2020 aggregate growth into positive territory at 0.7%. Notably, final consumption, China’s economic bread and butter, saw its contribution to GDP growth jump from -73% to 34.9%.

As Chinese consumers gained confidence to spend more loosely, they lent a helping hand to China’s services industry. Tertiary industry saw its contribution to GDP rise from 32.7% to 45.4%, bringing Q3’s results more in line with growth indicators of pre-COVID times.

Bottom line: If you thought this quarter was strong, just wait. According to Q3 data, per capita income nationwide grew by 0.6% and median income grew by 3.2%, marking the first signs of positive wage growth this year. Consumption officially returned to growth in August, and it seems things are headed up from here.


Economics | Policy

Of Wine and Friends, the Oldest Is the Best

Hello LGFV, my old friend. China’s come to make use of you again…

Over the past few years, Beijing has abandoned the murky local government financing vehicle (LGFV) in favor of a more transparent alternative. But, since the pandemic has left the domestic economy running at just a whisper, officials have been touched by the vision of crises past and welcomed back their old friend with open arms.

But first, a crash course on LGFVs

LGFVs are local government-owned companies that raise money through loans for municipal construction and infrastructure projects. During the global financial crisis in 2008, LGFVs were the go-to emergency solution to supplement Beijing’s stimulus. They’ve since fallen from grace due to their off-budget borrowing – which means that they’re an accounting black hole for auditors – and their typical negative investment returns.

Because they’re government-owned, when their loans indubitably default, the government is on the hook to bail them out – with the broader economy left picking up the tab. Despite Beijing’s best efforts to boot these financing solutions, “hidden” LGFV debt has continued to drag on local economies, having outpaced GDP by over 30% since 2008.

Enter COVID-19

The pandemic has echoed the economic conditions faced by China in 2008. In the first quarter of 2020 alone, China’s national general budget revenue decreased by 14.3% year-over-year. For local governments, the decline ticked slightly lower at 12.3%.

With local economies squeezed but officials still expected to kick their local economies into overdrive, many have reconciled with their old friend as they prioritize hitting their short-term economic growth targets set forth by Beijing. LGFVs have since roared back to life, recently raising record-high funds for traditional infrastructure projects.

Bottom line: Support for LGFVs is likely short-lived. Beijing knows it’s walking a fine line – lowering the reserve ratio, relaxing credit requirements, merging at risk financial institutions, revitalizing LGFVs, the list goes on. Though China’s economy has come back online, Beijing’s efforts have built a temporary bridge over troubled waters that is likely to cause significant drag as an all-but-certain debt crisis looms with mountains of bad debt maturing over the next several years.


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Industry

Amber Waves of Grain Bring the Gold

干杯!Cheers! If you thought you were the only one reaching for a cold one more often during the new normal, you’re not alone. Chinese breweries have been at the top of their game in the world’s largest market for beer, ushering in a new golden era for the hopping industry.

It’s thought that the ancient Chinese were brewing beer as far back as 7000 BC, though the beer market in China only recently reached its peak in 2013. As the largest market and one of the largest exporters of beer, there’s always been more than enough brewskies to pass around.

More recently, cost cutting and industry consolidation during the pandemic coupled with a healthy thirst for beer have led to record-smashing incomes for China’s largest breweries in the first six months of 2020. Tsingtao Brewery was up a whopping 13.8% from 2019 while CR Beer saw gains of 11%, and these numbers should continue to rise with consumer demand fully recovering to pre-pandemic levels in August.

Bottom line: Not only are domestic breweries winning over traditional beerheads, but they’re also finding a growing opportunity to cater to beer aficionados’ shifting taste towards craft beers – giving Germany, Belgium, and the US a run for their money. Here’s a toast to their continued success!


Economics | Trade

All Sunshine and Rainbows for the CNY

Ding ding ding! The CNY is looking strong in its corner of the ring these days. China’s currency has strengthened by 4% this quarter against the USD and is on track for its largest quarterly gain since 2008.

Dipping below 6.7 CNY per USD this month, the renminbi has been rallying since late June, maintaining lows unseen since April 2019. China’s economic recovery has driven the CNY’s strength as it remains the only major global economy to register positive growth this year, while the US economy’s prolonged recovery has left the USD on unsure footing as it has declined nearly 11% since its highs in late March.

Bottom line: Delivering the 1-2 knock-out punch is the PBOC itself. The hook came after China flooded international markets with hundreds of billions of USD from its foreign exchange reserves as it looked to shore up the influence that US monetary policy has on Chinese markets. Then the uppercut landed when the PBOC returned to precedent unseen in years by setting the CNY loose in hopes that a stronger currency would support domestic consumption. With investors continuing to bet on the renminbi throughout the end of 2020, the USD might be tapping out this round.


Industry

Hooked on Healthy Living: China’s Craving for Vitamin Supplements

China’s rapid economic development and rising household incomes have enabled a broader consumer base to invest in a healthy lifestyle by means of vitamins and dietary supplements. While domestic brands compete via localized advertisements and low-price leadership, foreign brands still reign king in terms of luxury, quality, and prestige.

Full Article

Further Reading

The Weekly Steep

TWS: Nov. 23, 2020

The Weekly Steep

TWS: Nov. 16, 2020

The Weekly Steep

TWS: Nov. 9, 2020

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